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The headlines have been alarming. Northern California is littered with the carcasses of dead dot-coms, and most of those still breathing show all the vitality of a sick guppy. Venture capital financing has dropped, and initial public offerings are an endangered species. New economy stalwarts like Amazon.com Inc. announce sweeping layoffs, and investor darlings like Cisco Systems Inc. miss their earnings targets. It’s enough to make a Silicon Valley venture capitalist weep over her biscotti. On the law firm front, our Corporate Scorecard confirms a distinct slowdown in IPOs — a cornerstone activity for the big Valley firms. In 1999 the top 15 law firms on our IPO charts took 200 venture-backed companies public. This year the number shrank 20 percent, to 160. Although the Valley’s Big Three — Wilson Sonsini Goodrich & Rosati; Cooley Godward; and Brobeck, Phleger & Harrison — held on to the top three spots on the issuer-side chart once again, Wilson Sonsini and Brobeck handled fewer offerings than they did in 1999. (Cooley ended up with one more.) So far this year the IPO pipeline looks like the Los Angeles River in July: a murky trickle. By the end of February only nine companies had gone public. So the Bay Area firms must really be hurting, you think — or (admit it) hope. Well, not really. Not yet. No doubt, the white-hot pace at the Bay Area firms has cooled. But there have not been any layoffs, salary rollbacks, or cancellation of associate retention safaris. In fact, new economy firm leaders insist, publicly, that this slowdown is nothing but a welcome reprieve from the crush of business. But privately, putting aside the marketing spin, a few managers do reveal some potentially troubling signs, off the record. “We are seeing pockets of associates without enough work to do,” says a partner at one firm. Admits the head of another large firm: “We were a little panicky in November and December. It was a little slow, but it came around.” At this point, it’s a good idea to step back for perspective. The breakdown-inducing work levels of 1999 and early 2000 weren’t sustainable; call that the burn (out) rate. Last year the revenue of the Valley’s Big Three rocketed an average 55 percent. Now, the firms say, they’ve returned to saner levels of activity. And even with a sluggish IPO market, they explain, their corporate lawyers keep hustling with M&A action. As legions of companies give up their IPO dreams, they turn to Exit Strategy B: finding a buyer. Most of these are not multibillion-dollar deals; in fact, many are more the likes of dogcollar.com buying dogleash.com. But work is work. “Lawyers are busy whenever there is change. It doesn’t have to be upward change,” says Gordon Davidson, chairman of Fenwick & West. In fact, Davidson reports that January of this year was the busiest in Fenwick’s history, in part because of M&A work but also due to active intellectual property, litigation, and tax practices. The Valley’s Big Three have made sizeable strides up our M&A charts, with each handling a record number of deals last year. Wilson Sonsini oversaw 69 M&A deals worth a total of $108.3 billion last year, second only to Skadden, Arps, Slate, Meagher & Flom when ranked by number of deals closed. Brobeck, with 53 deals, rose from 13th place last year to fourth this year; and Cooley, which didn’t make our top 25 list last year, finished in 12th place this year. And in fact, these firms handled even more deals since this data omits transactions under $150 million, which are common in the Valley. One lawyer doing a lot more M&A work is Cooley partner Mark Tanoury. Last year at this time, when we profiled Tanoury, we detailed how he spent much of his day turning away work as he juggled a bevy of companies hell-bent on going public. This year he’s still busy, but his firm is no longer turning away acceptable work simply because it’s too busy. “It’s definitely slower than a year ago. No question it’s changed,” says Tanoury, who heads Cooley’s business department. He notes that the firm has budgeted for fewer billable hours per associate this year, but the ever-calm lawyer doesn’t sound alarmed: “Senior people [at Cooley] are not worried. But some young associates who have not been through cycles before are worried.” Tanoury concedes that his firm may not replicate last year’s impressive profits-per-partner numbers, which jumped 36 percent to $905,000: “We might, but it’s not a slam-dunk. This year will be a real challenge.” (Brobeck topped the $1 million mark last year; and Wilson Sonsini came close, at $925,000.) The client equity payoffs at Valley firms this year will probably pale next to the last few years’ returns. (Even in the absence of IPOs, however, firms can turn a nice profit on cheap, early-stage investments when a client gets acquired.) These firms are still pursuing investment opportunities, and having strong relationships with venture capital firms is even more important to attract the more selective crop of companies getting funded. “We still have an [equity] interest in every startup company we take on,” says Fenwick’s Davidson. Still, he notes, many companies are less willing to give equity, and law firms are less aggressive with their demands. Cooley’s Tanoury suggests that getting equity could become increasingly difficult if more firms start using a no-equity feature as part of a competitive pricing pitch. So far, however, he hasn’t seen this happening. Over at Wilson Sonsini, Donna Petkanics, the firm’s managing partner for operations, asserts that her firm isn’t suffering, even though it reigned as the IPO champion of the late 1990s — handling more than 200 over the last three years, including underwriter work. “Yes, it’s a big part of our business. But these clients are looking at other financing alternatives,” says Petkanics. She confirms that average billables dipped in the fourth quarter, compared to 1999, but doesn’t sound concerned. “I think growth will slow, but it’s not a bad thing. People can focus,” Petkanics explains. “It’s no doomsday.” In fact, Wilson Sonsini feels so confident that in February it opened new offices in New York and Salt Lake City. “We strongly believe the technology sector is still the sector that will lead the nation’s economy, if not the world’s economy,” says Wilson Sonsini partner Donald Bradley, the firm’s general counsel. He predicts the tech sector will turn around in six months to a year, and when it does, he says, “it will come back strongly.” Brobeck managing partner James Burns maintains that his firm may be better positioned than some to ride out the market changes. He notes that roughly half of Brobeck’s revenue comes from litigation, which has long been a major part of the firm’s practice (despite its technology-focused marketing push). And even on the corporate side, things aren’t too bad. “The work flow is still strong,” he notes. “Deals that are tougher to do are in some sense better for lawyers.” That’s because, in this uncertain market, deals are harder to price and parties want more protection in their contracts. And that means more work for lawyers. J. Terence O’Malley, chairman of Gray Cary Ware & Freidenrich, calls the current conditions a “welcome respite” from an overwhelming demand for services. O’Malley, in fact, boldly predicts more growth for his firm — even though hours logged by corporate lawyers were down 5�10 percent in late 2000 and early 2001. “We believe we will see a 25�30 percent revenue increase in 2001,” he asserts. “The IP practice continues to be extremely strong. Litigation is very strong.” Rumors have circulated about the L-word — layoffs — although as of late February, no California firm had acknowledged letting people go. The head of one firm says it is, however, using reviews to weed out poor performers: “In fat times, you tell somebody, ‘I’m not sure it’s going to happen for you, but I hope things turn around.’ In lean times, you say, ‘It’s not going to happen for you, and you need to find a new job.’ “ In this environment, lateral hiring for corporate associates has nearly ground to a halt. The any-kid-with-a-pulse-and-a-bar-ticket ethic has been shelved. “We’re not stopping, but we’re probably being more selective,” says Fenwick’s Davidson. Echoes Brobeck’s Burns: “We’re on a much more cautiously guarded recruitment program now.” This year’s right size may be rather different from last year’s, when firms bulked up on associates like sumo wrestlers at an all-you-can-eat buffet. Brobeck hired nearly 250 laterals. Wilson Sonsini took in roughly 150. Morrison & Foerster hired 200, in addition to bringing in 100 first-years. The prospect of hallways filled with idle lawyers — starting at $125,000 — frightens managers and suddenly not-so-greedy associates alike. “With this level of compensation, it’s the devil’s bargain imposed on us all,” says the head of one firm. Not only do the Bay Area firms have a lot more mouths to feed, but they’ll soon have a lot more space to fill. Fenwick is planning to move into a building under construction in Mountain View, Calif., that will more than double the firm’s 120,000 square feet in Palo Alto. Brobeck has signed on for 143,000 square feet of new office space in East Palo Alto, which it plans to occupy next year. Wilson Sonsini, which is already sprawled across six buildings in Silicon Valley, will later this year take additional space to house 50�-60 more lawyers. One sign that times have changed emerged in January, when Brobeck bumped up associate pay, with first-years getting as much as $170,000 if they hit billable-hours targets. This time, Brobeck’s competitors, for the most part, didn’t follow. (Only Pillsbury Winthrop and Gray Cary jumped on board.) With attrition abated — few associates are jumping to startups — firms like Wilson Sonsini and Cooley didn’t see the need to add more pressure to their bottom lines. The truth, of course, is that nobody knows for certain how the rest of this year will play out for the Bay Area firms. For the moment, exuberance is no longer the prevailing sentiment. Says Fenwick’s Davidson: “We’re cautiously optimistic.” In other words, no one is panicking. Yet. Related Charts: Counsel to the Five Best- and Worst-Performing IPOs in 2000

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